Opinion: Transparency boost for franchising
March 28, 2012 | BY
clpstaff &clp articles &MOFCOM's latest bid to strengthen commercial franchising will protect trade secrets and increase fines for providing false information during promotional activities. The Measures represent China's commitment to regulating this large, but young market
On February 23 2012, the Ministry of Commerce (MOFCOM) issued the Measures for the Administration of Information Disclosure in Connection with Commercial Franchising (商業特許經營信息披露管理辦法), which will come into effect on April 1 2012. The measures follow China's policies on “strengthening the regulation of commercial franchising activities” set out in Article 2.1 of the Guiding Opinion of the Ministry of Commerce on Further Promoting the Healthy Development of Franchises during the 12th Five-year Plan (关于“十二五”期间促进商业特许经营健康发展的指导意见). The Measures will enhance the legal liabilities of franchisors to disclose certain information in commercial franchise activities, slightly enlarging the scope of disclosure and further strengthening protection of trade secrets. Below is a summary of the main changes:
• An individual shareholder of the franchisor has been included in the definition of an “affiliated person of the franchisor”.
• The disclosure scope covers in greater detail technical support, business guidance, and other services to be provided by the franchisor.
• Disclosure of the business status of current franchisees, including the actual investment amount, average sales volume, cost, gross profit and net profit of the franchisees, has become a mandatory requirement, which means that the provision of only sharing the estimated business information is no longer permitted.
The Measures make business disclosures more transparent. Previously, franchisors could only disclose estimated business information instead of the actual business status of existing franchisees, although the latter was more important to potential franchisees. The actual business status of existing franchisees will help a potential franchisee better estimate risks and future returns.
• The amended Measures require disclosure of all cases in litigation or arbitration regarding the subject franchise in the past five years. Previously, only material cases were required to be disclosed.
• Protection of trade secrets in franchise activities has been strengthened. Whether a confidentiality agreement or franchise agreement is signed or not, the prospective franchisee should be obligated to keep the franchisor's trade secrets confidential.
The confidentiality obligation has become a mandatory obligation instead of a contractual obligation. This change is more favourable to a franchisor. However, a franchisor still bears the burden of proof to prove that the subject information has met all elements of a trade secret.
• Renewal of an existing franchise agreement under the same terms and conditions no longer requires information disclosure.
• The maximum fine imposed for providing of false information in promotional activities increases from Rmb100,000 to Rmb300,000 ($15,800 to $47,600). Criminal liability will be pursued if a crime is committed.
MOFCOM promulgated the measures in response to their general policies set out in the Guiding Opinions. The top priority is to enhance regulating commercial franchising activities, especially through a strict crackdown on commercial fraud and IP infringement in franchising activities. As this is a top priority, we believe there is a high chance regulations on franchising may be further tightened.
Other priorities include supporting the development of high-level brands, and promoting the standardisation of franchisors' internal management and audit systems. As well as the improvement of franchisors' franchise handbooks and the establishment of a franchise training and guiding mechanism, this will increase the establishment of public platforms. Some supportive policies for the franchise industry will also be promulgated.
China has become one of the largest franchise markets in the world, but the development of this market is still at an early stage. China is thus adopting a tighten-yet-support regulatory strategy to navigate the industry. Foreign franchisors need to monitor any future developments in franchising regulations, to stay compliant with the law.
Roy Zou, Kitty Zhang, and Jessie Xie, Hogan Lovells, Beijing
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